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S&P 500 21Q1: Gauging the ‘New’ Earnings Season

Jharonne Martis
Jharonne Martis
Director, Consumer Research
Tajinder Dhillon
Tajinder Dhillon
Senior Research Analyst, Refinitiv

Sixty percent of constituents have reported 21Q1 earnings as of April 30 and the quarter is on track for the record books for three reasons:

  • The 21Q1 earnings growth rate of 46.3% is the highest since 2010 Q1.
  • Of the 303 constituents that have reported earnings, 87.1% have beat analyst expectations. This is the highest on record (since 1994).
  • Companies are reporting earnings 22.8% above analyst expectations, which is the second-highest on record (since 1994).

Companies have been handily beating analyst expectations for the last few quarters and this trend shows no sign of abating. The 87.1% beat rate compares to a long-term average of 65.4%. At a sector level, Consumer Discretionary leads the pack with a 96.8% beat rate (50% of constituents have reported thus far). This is followed by Information Technology (94.6% beat rate and 49.3% reported) and Financials (92.7% beat rate and 84.6% reported).

While we have seen the highest beat rate on record in 21Q1, the amount companies are beating by is also at record levels. The earnings surprise of 22.8% compares to a long-term average (since 1994) of 3.6% and a prior four-quarter average of 15.2%.

A combination of a record beat rate and surprise factor has led to the dramatic improvement in the 21Q1 earnings growth rate.

Growth Rates

The same can be said for the retail sector. In the retail arena, positive revenue, earnings growth rates and Same Store Sales are traditionally strong metrics when companies report earnings. This year, however, a positive growth number isn’t necessary a sign of business profit. Moreover, a negative single digit growth rate could suggest that strong business has held up.

This Q1 earnings season is unusual because it marks the beginning of stay-at-home orders from a year ago. Same Store Sales (SSS), a metric used to measure retail sales for stores open at least a year are also referred to as Comparable Store Sales. The issue is there is no comparable year to 2020. Never before has there been a government mandate for retailers and companies to close their physical business. As a result, several retailers didn’t report SSS and many companies withdrew guidance back in Q1 2020.

Nevertheless, we are seeing strong momentum thus far. The 21Q1 earnings growth has improved 22.1 percentage points since the beginning of earnings season, which currently ranks as the largest increase ever since Refinitiv began tracking this data. This compares to a long-term average (since 2002) of 2.5 percentage point earnings growth improvement between the start and end of earnings season.

Exhibit 1: Growth Rates at Beginning vs. End of Earnings Season

Graph highlighting growth rates at the beginning vs end of Earnings Season.

How do earnings compare to pre-pandemic levels?

While 21Q1 is trending to be a monumental quarter, it is prudent to put this in perspective. One way to do this is to compare earnings today vs. pre-pandemic levels. Using 2019 Q1 as a base period, we see that S&P 500 share-weighted earnings have improved 24.0% from $319.4bn to $396.2bn in 21Q1.

At a sector level, Communication Services leads the way with a 54.5% increase in earnings compared to 19Q1, followed by Information Technology (49.6%), and Financials (34.8%).

From a dollar perspective, Information Technology has seen the largest increase ($29.5bn), followed by Financials ($22.4bn), and Communication Services ($15.8bn).

Only three sectors remain below pre-pandemic levels. Industrials are currently expecting $19.5bn in earnings this quarter compared to $29.9bn in 19Q1, resulting in a 34.8% decline when re-based.  Energy earnings are 30.4% off from 19Q1 levels, while Real Estate is only down 1.5%.

Exhibit 7: S&P 500 Share-weighted Earnings ($m)

Graph highlighting S&P 500 Share-weighted Earnings ($m)

This will be an encouraging sign for the market, which is looking to see earnings fill rich valuation levels. In April, 21Q1 earnings increased from $336.5bn to $396.2bn, a 17.8% increase, significantly outperforming the S&P 500, which gained 5.3% over the same period.

The FTSE Russell 1000 index is trading at a forward P/E of 23.3x compared to a 10-year average of 16.6x, marking a 40.3% premium.

For additional context, the FTSE Russell 1000 Growth index is trading at a forward P/E of 31.0x compared to a 10-year average of 19.3x, marking a lofty 60.6% premium. In comparison, the FTSE Russell 1000 Value index is trading at a forward P/E of 18.3x compared to a 10-year average of 14.5x, yielding a more reasonable premium of 26.2%.

Analyst estimates continue to rise

There may be a debate as to whether 21Q1 was so strong due to base effects (i.e. low 2020 comparables) or estimates not being raised quickly enough. Regarding the former, 20Q1 did not feel the brute impact of COVID-19 until the middle of March when economies started to lock down, which would indicate that 21Q1 earnings has been a success thus far. Regarding the latter, we are certainly seeing analysts’ estimates being revised upwards off the back of a strong 21Q1 season. Looking at the latest “This Week in Earnings” report, we have seen a sharp increase in the S&P 500 Earnings Estimate Revisions Trend during April.

We continue to see an upward trend in the percentage of upward revisions vs. downward revisions for full-year (FY1) estimates since February 2021. In the latest reading, of the 2,314 analyst estimate revisions that occurred during the week of April 30, 79% of estimates were higher than the previous estimates for FY1.

The upward revisions of 79% is the highest since November 6, 2020 and significantly above the long-term average (since March 2016) of 52%. As a result, we have seen the 21Q2 earnings growth estimate, improving six percentage points in April (54.0% to 60.0%).

Exhibit 8: S&P 500 Earnings Estimate Revisions Trend

Table highlighting the S&P 500 Earnings Estimate Revisions Trend

Graph highlighting the S&P 500 Earnings Estimate Revisions Trend

Watch: Jharonne Martis, Director of Consumer Research at Refinitiv, breaks down the blowout quarter for retail earnings.

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Faqs

What are the earnings of the S&P 500 in 21Q1?

Sixty percent of constituents have reported 21Q1 earnings as of April 30 and the quarter is on track for the record books for three reasons:

The 21Q1 earnings growth rate of 46.3% is the highest since 2010 Q1.
Of the 303 constituents that have reported earnings, 87.1% have beat analyst expectations. This is the highest on record (since 1994).
Companies are reporting earnings 22.8% above analyst expectations, which is the second-highest on record (since 1994).